Leave the Gun Take the (paulie) Cannoli

The View from Abroad

“That men do not learn very much from the lessons of history is the most important of all the lessons of history.” These are the simple, yet exceedingly relevant for our times, words of the famous English writer Aldous Huxley.

If only Federal Reserve chairman Ben Bernanke would acquaint himself with this quote.

For three years, between 2001 and 2004, in an effort to boost the economy after the 911 terrorist attacks, his predecessor at the Fed, Alan Greenspan, kept the Federal Funds Interest Rate under two percent. As a result, cheap money and low introductory teaser rates fueled the largest housing boom in American history. Then, like all fake boom phases, when interest rates rose it came to an end. The necessary correction phase started and all the mal-investment of the boom phase was no longer sustainable under higher rates. Foreclosures increased. As housing prices fell back to earth, underwater mortgages and abandoned homes were everywhere. Many still find themselves unemployed and destitute.

Now, instead of letting the market go through a much needed correction after the crisis began, new Federal Reserve chairman Ben Bernanke pursued a policy bent on “stabilizing” the value of assets. Since 2008, Bernanke’s Fed has kept the Federal Funds Interest Rate close to zero percent and it has increased its balance sheet by just under three trillion dollars by purchasing Treasuries and mortgage-backed securities from member banks.

Some economists believe Chairman Bernanke’s policies have created a housing recovery. These economists believe this because they haven’t learned from history, especially recent history.

But, according to David Stockman, the former head of the Office of Management and Budget under Reagan, what Bernanke’s policies have created is simply another housing bubble. He sees a similar combination of artificially low interest rates and speculation producing the current housing boom just like the boom during Greenspan’s tenure.

Nationally, the median price for existing single-family homes was $178,900 in the fourth quarter of 2012, up 10 percent over the same period in 2011. This marked the greatest year-over-year price increase since the fourth quarter of 2005.

And there are local pockets of even greater price increases in real estate going on. There is a farmland bubble taking place in the Midwest and Mountain states with non-irrigated cropland prices increasing on average by about 18 percent. Southern California, Silicon Valley, Washington D.C., and New York City are all experiencing huge real estate booms with prices for pre-construction condos in Manhattan increasing on a bimonthly basis.

It is ridiculous to believe that what we are seeing is anything other than another housing bubble. Unemployment and underemployment are still very high. Many employed middle income buyers are still reeling from the last bust. The huge price increases we are seeing is the work of speculators fueled by Bernanke’s easy money policies.

The bust will come when rates rise, the mal-investments of the boom become unsustainable at the higher rates, and the speculators liquidate their positions leaving small investors holding the bag. It will be 2008 all over again for many, except this time it will be Ben Bernanke’s Housing Bubble.

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